PetroSA Annual Report 2013 - Creating Value in the Energy Industry

1. Annual Report 2013 Presented to The Portfolio Committee on Energy Parliament of the RSA 10 October 2013

2. CONTENTS • Mandate • Issues discussed last year • Operating Environment • Highlights • Strategic Objectives • Performance Against Objectives • Transformation • Financial Performance • Audit Opinion • Closing Remarks

3. Our mandate as a national oil company • Operate as a commercial entity and create value for the shareholder • Pay tax and dividends • Advance national objectives in the petroleum industry • Spearhead industry transformation • Complement & promote Government policy & strategic thrust • Advance energy goals and objectives as set out in various • policy instruments , E.g. Energy White Paper (1998), Energy Security Master Plan • ( 2007), Medium Term Strategic Framework (2009-2014)

4. ISSUES DISCUSSED LAST YEAR • PetroSA was facing feedstock challenges at Mossel Bay. We had just started the Ikhwezi offshore project. • Feedstock challenges remain. Ikhwezi development is underway • Sale of Brass Exploration in Nigeria: Litigation was still in progress • This has now been finalised in our favour. • There were some outstanding Environmental Management matters in Mossel Bay • All recommendations are being implemented. • The Ghana Sabre Acquisition had not yet been finalised • Transaction finalised and contributing to PetroSA’s growth • Investigations into procurement irregularities were underway • Board investigations completed. Recommendations being implemented. • Ministerial investigations in progress.

5. OPERATING ENVIRONMENT • The global petroleum industry has remained volatile and highly competitive. • Crude prices averaged $110.10/bbl, down from $114.67/bbl 2011/12 • High crude prices increase the cost of imported inputs, though there is a positive impact on revenues. • Low production rates reduced the benefit from high prices. • High prices also increase hydrocarbon asset prices and the general cost of doing business. • Average Exchange rate was R8.53/$, vs. the R7.45/$ for 2011/12. • Weak rand increases capital costs and the cost of imported items like condensate (used at the Mossel Bay refinery). • Positive impact on revenues. • RSA’s low growth rate, high unemployment and high levels of inequality and poverty remain a concern. As NOC we are committed to deliver our mandate.

6. THE YEAR UNDER REVIEW • General: • PetroSA is committed to South Africa’s quest for security of supply and socio-economic growth and transformation. • We have continued to operate safely and profitably, in the face of severe challenges of declining indigenous feedstock and rising feedstock costs. • Revenue up by 36% from R14.4 billion to R19.6 billion • Net profit down 54% from R1.28 billion to R593 million • Mossel Bay refinery sustainability has remained a key focus area: • Our offshore drilling project off the south coast of SA, (Project Ikhwezi) is in progress • The project to import liquefied natural gas (LNG), has progressed, with public consultations starting early 2013.

7. THE YEAR UNDER REVIEW • Ghana: • The acquisition of oil reserves in Ghana was completed during the year and the asset is performing well. • Transformation • We built and handed over our first Integrated Energy Centre, in Mbizana, Eastern Cape. • R21 million invested in community projects. • 1300 (or 71% of workforce) employees trained • Training costs amounted to 2.4% of the total wage bill. • 287 million litres sold to BEEs. • 52.7% of total discretionary procurement spend went to BEEs

8. PETROSA’S INTEGRATED ENERGY CENTRE

9. To be a sustainable, fully integrated, commercially competitive National Oil Company supplying at least 25% of South Africa’s liquid fuel needs by 2020. Strategic Objective MTHOMBO 25% 5% MTHOMBO Downstream logistics LOCAL DEMAND LNG SHALE GAS IKHWEZI CURRENT 2010 2013 2015 2018 2020 2030

10. PERFORMANCE AGAINST OBJECTIVES

11. ~ Achieved ~ Partially Achieved ~ Not Achieved PERFORMANCE AGAINST OBJECTIVES

12. ~ Achieved ~ Partially Achieved ~ Not Achieved PERFORMANCE AGAINST OBJECTIVES

13. ~ Achieved ~ Partially Achieved ~ Not Achieved PERFORMANCE AGAINST OBJECTIVES

14. ~ Achieved ~ Partially Achieved ~ Not Achieved PERFORMANCE AGAINST OBJECTIVES

15. ~ Achieved ~ Partially Achieved ~ Not Achieved PERFORMANCE AGAINST OBJECTIVES

16. TRANSFORMATION

17. ~ Achieved ~ Partially Achieved ~ Not Achieved PetroSA’s BEE Current STATUS

18. Preferential Procurement Policy Framework Act • Regulations stipulate that an organ of State must, determine and stipulate the preference point system to be utilized in the evaluation and adjudication of tenders. • The regulations stipulate that where a local entity has tendered, points must be awarded to the tenderer recognising their BBBEE status up to a maximum of 10 points. • Procurement of hydrocarbons is through the tender process, governed by the PPPFA which requires a 90/10 preferential point scoring method. (90% price based; 10% BBBEE status) • PetroSA operates in a regulated pricing environment characterised by low margins which can be further compounded by the payment of premiums

19. Preferential Procurement Policy Framework Act • In 2011 PetroSA was granted an exemption from complying for one year . This exemption expired in December 2012. Discussions currently underway with Finance ministry for exemption. • In the year under review, hydrocarbon purchases valued at R4.1 billion were made, of which R 1.7 billion was made from BBBEE entities • In total 54 transactions were concluded of which 3 (total value R 605 million) were non compliant to the PPPFA

20. FINANCIAL PERFORMANCE

21. Consolidated Income Statement 2012/13 vs. 2011/12 • NOTES • Revenue • Higher than last year mainly due to weaker R/$ and contribution from Sabre • Cost of sales • Higher than last year because of increased sale of purchased product; the margins of which are lower • Other Operating Income • Purchase of Pioneer Natural Resources share of equity in Block 9 had positive impact (R254m) • Other Operating Expenses • Due mainly to demo plant write-down (R360m) • Investment income • Lower cash balances due to recent investments • Finance costs • Notional interest on abandonment higher due to inclusion of Pioneer Natural Resources equity in Block 9 and revaluation of Absa $ loan R222m

22. Consolidated Balance Sheet 2012/13 vs. 2011/12 • NOTES • Property, Plant, Equipment • Higher than budget and prior year due to Sabre (R5.1bn) & fair value adjustment • Cash • Higher than budget because of delay in execution of Downstream acquisition • Deferred Tax • Sabre as a result of fair value adjustment on consolidation • Provisions • Higher due to rehab costs of acquired Sabre asset and Pioneer Natural Resources share of Block 9 purchased • Loans • Loan for Sabre purchase raised, to be re-financed after Sep’2013

23. CASHFLOW STATEMENT -2012/13 vs. 2011/12 • NOTES • Cash from Operations • Positive for the year due to lower working capital levels • Interest paid • Less than budget due to loans not raised • Property, Plant, Equipment • Higher than prior year due to Sabre acquisition • Loans • Loan for Sabre purchase raised in PetroSA • Bank Loans and related party loans in Sabre repaid on acquisition PPE & Sub. Acquired = Property, Plant & Equipment and Subsidiary Acquired

24. PetroSA Group Results – Audit Opinion • The PetroSA group was issued with an unqualified audit opinion. • An emphasis of matter, which does not modify the audit opinion, was raised for the following items: • Significant Uncertainties • The company has disclosed fruitless and wasteful as well as irregular • expenditure incurred during the financial period under review. • As some of the investigations were either still in the process of being finalised or previous recommendations still being implemented, further fruitless and wasteful expenditure and/or irregular expenditure may still require disclosure in subsequent periods. • Material Impairments • Material impairments to the PetroSA Equatorial Guinea loan account in the • 2013 financial period to the amount of R186.4 million (2012: R1 412 million) were incurred.

25. PetroSA Group Results – Audit Opinion • Report on Other Legal and Regulatory Requirements • Predetermined Objectives • There were no material findings on predetermined objectives, concerning usefulness and reliability of the information. • Material misstatements in the performance against objectives report were identified during the audit, all of which were corrected by management. • Achievement of Planned Targets • 33% of total planned targets were not achieved during the year under review. • Annual Financial Statements • Annual financial statements submitted for auditing were not prepared in all material aspects in accordance with the prescribed reporting framework and as required by the PFMA and the Companies Act. • Material misstatements of revenue identified by the auditors were subsequently corrected .

26. PetroSA Group Results – Audit Opinion • Report on Other Legal and Regulatory Requirements • Audit committee • Contravention of the Companies Act in that an audit committee member that served during the current financial period had also been involved in the day-to-day management of the company's business. • Expenditure Management • Steps were not taken to effectively prevent fruitless and wasteful and irregular expenditure. • Fruitless and wasteful expenditure of R31m and irregular expenditure of R866m were incurred.

27. PetroSA Group Results – Audit Opinion • Report on Other Legal and Regulatory Requirements • Environmental compliance matters • Contravention of the National Environmental Management Act as timely corrective action has not been implemented with regards to contamination at the operating facilities. • Procurement and contract management • Certain goods and services were not procured through a procurement process which is fair, equitable, transparent and competitive as required by the PFMA. • Contracts were awarded to bidders based on preference points that were not allocated in accordance with the requirements of the Preferential Procurement Policy Framework Act.

28. PetroSA Group Results – Audit Opinion • Other Reports • Investigations • An investigation, mandated by the Board Audit and Risk Committee, into possible irregularities relating to the procurement policy, was completed and recommendations from this investigation are in the process of being evaluated and implemented by those charged with governance. • An investigation, mandated by the previous Honourable Minister of Energy, Mrs Peters, into all significant procurement for goods and services that are not considered to relate to the GTL operations of PetroSA, is still in-progress.

29. PetroSA Group Results – Audit Opinion

30. PetroSA Group Results – Audit Opinion

31. PetroSA Group Results – Audit Opinion

32. CONCLUDING REMARKS The organisation continues on its NOC Mandate to support security of supply. • 2012/13 was a profitable year, but operating conditions remain tough. • The focus is on sustaining on the GTL refinery at Mossel Bay, focussing on the gas supply challenge. We will use this as a platform for growth. • We are tightening financial and operational performance and controls. • Our Vision 2020 growth strategy will advance job creation, enterprise development and other key transformation initiatives.

33. CONCLUSIONS The organisation continues on its NOC Mandate to support security of supply. • 2012/13 was a profitable year, but operating conditions remain tough. • The focus is on sustaining Mossel Bay, focussing on the gas supply challenge. We will use this as a platform for growth. • We are tightening financial and operational performance and controls. • Our Vision 2020 growth strategy will advance job creation, enterprise development and other key transformation initiatives.

34. Other Operating Expenses2012/13 vs. 2011/12

35. PetroSA Group Results – Audit Opinion

36. Thank You!